Advocating a boycott of West Bank settlements could lead to financial penalties in Israel under a new law passed on Monday with the blessing of Prime Minister Benjamin Netanyahu.
Critics of the bill pushed through parliament by right-wing lawmakers called the measure anti-democratic and a blow to free speech.
Parliament's speaker, Reuven Rivlin, said he had appealed unsuccessfully to Netanyahu to seek a rewording of the legislation after the assembly's legal adviser issued an opinion that it "impinges on political expression" in Israel.
The vote -- carried by 47 to 38 in the 120-seat plenum -- went ahead amid an outcry from opposition legislators and civil liberties groups.
"What this law will enable is for anybody harmed by a deliberate boycott campaign to seek damages through the courts," said its sponsor, Zeev Elkin, a member of Netanyahu's right-wing Likud party.
Supporters of the bill said its reference to boycotts based on "geography" was aimed at countering calls in Israel and abroad for cultural and economic boycotts against settlements in the West Bank, occupied land Palestinians want for a state.
The issue grabbed headlines in Israel several months ago after leading performers said they would not appear at a theatre in Ariel, one of the biggest settlements in the West Bank.
The Association of Civil Rights in Israel (ACRI), an opponent of the bill, said that "regardless of one's position on the question of promoting or opposing a boycott, it is unquestionably a protected form of free speech".
In an editorial, Haaretz, a left-wing newspaper, said lawmakers who voted in favour of the bill were "supporting the gagging of protest as part of an ongoing effort to liquidate democracy".
Palestinian negotiator Saeb Erekat said in a statement that making "the boycott of Israeli settlement products punishable by law will send a clear message that Israel is not committed to a two-state solution".
Some 300,000 Israelis live in about 100 settlements in the West Bank, territory home to 2.5 million Palestinians. Most world powers deem the settlements illegal.